Income Tax & TDS on Interest on Recurring Deposit (RD)

When you have a lump-sum amount to invest, it is always advisable to invest in Fixed Deposits. But when you don’t have a lump-sum amount to invest, and can save a defined amount from your income every month, Recurring Deposits are always more advisable.

The depositor has the option to either reinvest the Interest earned on Recurring Deposits or to withdraw the Interest earned on Recurring Deposits.

However, TDS would be liable to be deducted in both the cases. The manner and rate of Income Tax & TDS on Recurring Deposits (RD) has been explained below in detail.

TDS & Income Tax on Recurring Deposit

TDS on Recurring Deposits would be deducted @10% of the Interest earned. Earlier, TDS was not deducted on Recurring Deposits but with effect from 1st June 2015 – TDS on Recurring Deposits would be deducted @ 10% under Section 194A

Budget 2015 has introduced an amendment to Section 194A and now the meaning of the word Term Deposits includes Recurring Deposits and therefore TDS @ 10% would be applicable on Recurring Deposits. However, No TDS would be deducted on Interest earned upto Rs. 10,000 to safeguard the interests of the small depositors.

Income Tax on such interest on Recurring Deposit would be levied as per the Income Tax Slab Rates of the person receiving the interest. The current income tax slab rates can be divided into the Nil category, 10% category, 20% category & the 30% category.

The person receiving the Interest on RD cannot claim any deduction on the same and tax would be levied on the full interest amount as compared to Interest on Savings Account on which a deduction of Rs. 10,000 is allowed.

Comparison of Tax on Interest on Recurring Deposit, Fixed Deposit and Savings Account

Particulars

Tax on Interest on
Fixed Deposit

Tax on Interest on
Recurring Deposit

Tax on Interest on
Savings Account

Applicability of TDS

TDS @ 10% of Interest

TDS @ 10% of Interest

No TDS

Income Tax Deduction allowed

Full Interest Taxable

Full Interest Taxable

Rs 10000 deduction

Income Tax on Interest

As per Slab Rates

As per Slab Rates

As per Slab Rates

Savings Account yield the lowest interest as compared to Recurring Deposits and Fixed Deposits and therefore an individual should not prefer to keep much amount in savings account as the interest earned is fairly low. A person should transfer money from Savings Account to Fixed Deposit if he has funds for a lump-sum investment or else transfer funds to Recurring Deposit if he can save a defined sum after every period.

Many financial planners have started advising their clients to place their surplus lump-sum funds in Fixed Deposits and also to start Recurring Deposit and Mutual Fund SIP’s in which deposit is required to be made every month as it inculcates the habit of saving every month.